With so many different savings goals, it’s helpful to know about the numerous investment and retirement accounts available to Canadians, to help them achieve those. Let’s sift through the alphabet soup of account types for various needs and objectives.
Cash, Open or Non-Registered Account
Cash accounts are not registered and subject to full taxation on all income, gains and distributions. Sometimes referred to as open accounts, these are typically in a single currency — Canadian or U.S. dollars. There are no government limitations on what can be held in these types of accounts, but all income is fully taxable and must be reported to the Canada Revenue Agency (CRA).
Tax-Free Savings Account TFSA
Anyone 18 or older with a valid SIN can set up a TFSA, which allows investments held within it to grow while escaping taxation, as any income or gains are not taxed and withdrawals are tax-free. There are annual contribution limits, but unused contribution room carries forward to expand future years’ allowed contributions. Contributions are made with after-tax money and TFSA holdings can generally be withdrawn without any tax consequences.
Registered Retirement Savings Plan (RRSP) and Spousal Registered Retirement Savings Plan
RRSPs are the most popular Canadian retirement savings plan. Anyone can start contributing once they have earned income and file a tax return. The annual contribution limit is set as the lesser of 18% of the plan holder’s earned income and the CRA-mandated maximum. Contributions are tax-deductible and RRSP holdings grow tax-free while inside the plan. When the holder reaches the age of 71, the RRSP gets converted into a Registered Retirement Income Fund (RRIF) to provide income during retirement.
Spousal RRSPs enable higher-income spouses to contribute to their spouse’s account with the assets belonging to the receiving spouse and taxed in their hands. They became less appealing when pension income splitting was introduced in 2007.
Registered Retirement Income Fund (RRIF) and Spousal Registered Retirement Income Fund
Canadians can convert RRSPs into RRIFs at any age, but all RRSPs must be converted by the end of the year in which the planholder turns 71 (this was increased from 69 back in 2007). Spousal RRSP money must be converted into a Spousal RRIF and holdings in both grow tax-deferred, but funds are taxable when withdrawn. RRIFs provide retirees with income from Canadian savings vehicles, like RRSPs. There are no maximum withdrawals, but anything beyond the mandatory minimum will trigger withholding taxes. New contributions are not permitted.
Locked-in Retirement Savings Plan (LRSP) and Locked-in Retirement Account LIRA
If someone leaves their employer before reaching the minimum pension age, all accumulated pension funds not taken in cash get transferred to a LIRA or LRSP, where they can continue to grow tax-free. LIRAs come under provincial legislation, while LRSPs are subject to federal legislation. Both are tax-sheltered plans for growth and any income received, but withdrawals are subject to taxation. Upon reaching the prescribed age, LIRAs and LRSPs must be converted into one or a combination of LIF, LRIF, RLIF, PRRIF and/or Life Annuity.
Life Income Fund (LIF) and Locked-in Retirement Income Fund (LRIF)
Much like a RRIF, these work as vehicles for delivering income during retirement, except that only funds from locked-in pension accounts can be used to establish a LIF or LRIF. Account holders are required to withdraw a minimum amount annually and income earned is tax-sheltered until withdrawn. There are also withdrawal maximums. LRIFs are only available in Newfoundland and Labrador.
Restricted Life Income Fund (RLIF)
Funds can be transferred to a RLIF from a workplace pension plan when someone leaves their employer at or before retirement. This is a one-time opportunity to unlock and transfer your money up to 50% of federally-regulated pension funds, to a regular RRSP or RRIF. Essentially, a RLIF allows for half of those pension assets to be converted into retirement income while deferring taxes. There are annual minimum and maximum withdrawal amounts for RLIFs.
Prescribed Registered Retirement Income Fund (PRRIF)
This type of account gives people with Manitoba or Saskatchewan regulated pension funds a way to turn money saved in a pension plan or LIRA into income when they retire. Very similar to a RRIF, but PRRIFs are subject to additional rules set out in separate provincial laws. There is no maximum withdrawal limit.
Registered Education Savings Plan (RESP)
RESPs are tax-deferred accounts to save for post-secondary education; usually a child, grandchild or niece/nephew. Anyone can open an RESP as the subscriber. Some plans have a single beneficiary while others have multiple beneficiaries. The three types are family plans, individual plans, and group plans. Contributions are not tax-deductible and there is a lifetime contribution limit of $50,000 per beneficiary. Government grants are available on qualifying RESP contributions, via the Canada Education Savings Grant (CESG).
Registered Disability Savings Plan (RDSP)
RDSPs are savings plans to help Canadians save for the long-term financial security of a disabled loved one, and they are strictly regulated. They include government grants based on the income of the beneficiary and tied to their eligibility for the Disability Tax Credit. Withdrawing from an RDSP before age of 60 is possible, but it will trigger penalties. Withdrawal calculations and the applicable tax determinations are fairly complex.
In Trust For Account (ITF)
These non-registered accounts are set up for the benefit of another person – usually a minor child. The account holder is the trustee, who makes contributions on the child beneficiary’s behalf. There is no need for a deed of trust since these are informal trusts. Any withdrawals while a minor must be used for the child’s benefit. When the beneficiary reaches the legal age of majority in their home province, they are entitled to the proceeds of ITF accounts in their name.